Showing posts from December, 2017

Buying a home? Plan to live there at least five years

I’m noticing an alarming trend in my neighborhood, an abundance of newly built homes for sale after only a few years of occupancy.  I get that sometimes people have to move due to life circumstances like job relocation, financial hardship, bad neighbors (anyone have the neighbor that decorates their lawn for every occasion-Christmas, Halloween-okay Houston Texans games…? Really?!).
I live in a new master planned community near Houston, TX (thankfully we weren’t victims of Hurricane Harvey).  My home was completed in 2014 and many of the homes being put up for sale were built around the same time plus or minus a few years.  My builder hasn’t even completed selling all of the lots in my subdivision yet there are at least 8-9 houses for sale.  My husband thinks that maybe people are leaving due to the high property taxes (Texas has no income tax so homeowners largely fund the government and services).
As a former apartment dweller, I definitely recommend buying versus renting-no thin wa…

There’s nothing wrong with checking your 401k every day…right?

Since taking control of my finances I have developed an obsession with checking my investments every day, reading every article about retirement and investing that pops up on the Wall Street Journal website, and watching CNBC’s Squawk Box in the mornings as I get ready for work.  Is this unhealthy? Are there other investment junkies like me out there?  Are there support groups available?  Is my husband planning the intervention? 
Well I have decided it is okay to regularly check my portfolio and monitor the daily whims of the stock market…I just don’t ACT on any of the information.  I stick to my program of regular investments in index funds.  Plus, following the markets has given me a better understanding of the workings of our economy making me an informed citizen (I’m rationalizing I know).
Financial News outlets tune me into the impact of general news and politics on the markets and economy as a whole.  I’ve been hearing about tax reform since the US election last year-is it pr…

Don't sell in a market downturn, Buy and Hold Index Funds!

With the market at all-time highs, there’s at least one interview or article in the financial news media asking if we’re at a market peak and if a crash is inevitable.  “This is the second longest bull market in history,” knowing interviewees (from banks or financial advisory services companies promoting their firms) pontificate, “we are due for a correction.”  “This market is overvalued” or “the Shiller Cape has surpassed dot com bubble and great recession peaks.”  Okay sure the market does look relatively expensive with the S&P 500 with a trailing price to earnings (P/E) of 25.72-historic is more like 15-16. 
Do not listen to the talking heads.  Yes there will be a downturn but no one knows when this bull market will end.  It is impossible to predict the next crash-recall no one saw the great recession coming.  For all we know, the next downturn could be another two or three years away.  You could be giving up huge gains worrying about a mild downturn.   Because you’re an index…

Looks like we're getting tax reform-Invest those tax savings!

So, for my US readers, it looks like Congress is going to pass tax reform.  Whatever your political persuasion or views on the Republican Tax Plan-if you’re one of the winners under tax reform-don’t waste the money on frivolous purchases!  Invest those yearly savings.

Let’s do a simplified example (please consult with a tax professional to understand the full impact of this legislation on your tax obligations).  A taxpayer decides to invest $5,000 of their tax savings annually in a low cost index fund.  Assuming a 7% rate of return over 30 years (and that the cuts don’t expire in 2026)-that’s a $472,303.93 addition to their retirement savings.  

How much you save to invest is as important as choice of asset class or allocation. The more you invest today, the more you potentially have in retirement income later.  That’s why it’s important to pay down debt, set and adhere to a household budget, and forego frivolous purchases-like a new car every five years.  If you spend everything you…

The Power of Compounding Interest and Time on Investment Returns

Compounding Interest is interest (return) that builds on prior period interest.  Say you invest $1000 in an asset that compounds 10% annually.  This is how your investment grows overtime:
Rate of Return: 10% Annually Initial Investment: $1000
Year 1: $1,000    +   $100       = $1,100Year 2: $1,100    +   $110       = $1,210Year 3: $1,210    +   $121       = $1,331Year 4: $1,331    +   $133.1    = $1464.1Year 5: $1464.1  +   $146.41  = $1610.51

Notice how the annual gains increase overtime?  That’s compounding interest-money going to work to make more money.  This is why it is important to begin saving for retirement as early as possible so that the power of compounding has time to work its magic on your savings.  This is also why it’s important to pay down high interest credit cards-if you’re paying the minimum on a credit card charging 15% of interest over time you can end up paying several times more for that handbag or television than the initial purchase price.  Worse, money you’r…

Should I reinvest dividends?

When a company or fund issues dividends shareholders are often given the option to participate in Dividend Reinvestment Programs or DRIPs.  DRIPs allow dividends to be paid out to shareholders in additional shares rather than cash.  DRIPs enable investors to leverage the power of compounding interest because: Additional shares purchased have the potential to continue to appreciate and if held generate future dividendsShares issues via DRIPS are issued without trading feesFractions of shares rather than whole shares can be purchasedDRIPs automate investing
Whether or not you should participate in DRIPs depends on your financial situation Do you need the income that comes from DRIPs to live on? If so you’ll want to take your dividends in cash.DRIPs can throw off your portfolio’s asset allocation because new shares are issued in the same asset.This can push your allocation out of balance.If you would prefer to use the cash to purchase shares in a different asset-DRIPs may not be right for…

Index Fund Investing Research

Conducting Research

To research Fidelity’s S&P 500 Index Fund (Ticker: FUSEX), or another provider's, look it up on your brokerage's website (see notes on navigating to Fidelity's investment products below).

The key item I look for in any index fund are the fees or expense ratio.  FUSEX has an expense ratio of 0.09% meaning that this fund will charge 90 cents per year for every $1000 invested in management fees to own this fund.  Also evaluate how well funds track their underlying index over time referred to as tracking error.  Some providers will report this directly but if yours does not you can head over to Google Finance and plot your fund versus its benchmark overtime.  In the example below, Fidelity’s Russell 2000 Index Fund (Ticker: FSSVX) is plotted against the Russell 2000 Index (Ticker: RUT).  You can see FSSVX tracks its benchmark within reasonable error-there’s a pretty steady delta over time.  Note: over long periods the difference will be largely due to t…

Small Cap, Large Cap, Growth, Value, International Index Investing

So which index funds should you invest in? Bogleheads, followers of Jack Bogle the man who created the first index fund and Vanguard, would say all you need is a Total US Market Equity Fund and Total US Bond fund at the right allocation percentage and then call it a day.  Warren Buffet tells people asking for investment advice that he’s instructed the manager of his estate to put his widow’s inheritance 90% in the S&P 500 and 10% in bonds. Burton Malkiel recommends a mix of Large and Small Cap US domestic equity funds, International and emerging market index funds, REITs and Total Market Bond funds. What advice do I follow?

I’m a huge fan of Burton Malkiel, author of A Random Walk Down Wall Street, and his investment advice.  I’m in a mix of small, mid, and large cap domestic funds, international and emerging market funds, Domestic and International REIT’s as well as Total Market Bond Funds. 

Many, including Warren Buffet and Jack Bogle, don’t see the need to invest in internati…

Asset Allocation is your #1 investment decision!

Asset Allocation

Asset Allocation is the split of your portfolio between stocks and bonds (and other alternative assets like gold or other commodities).  Asset Allocation is one of the most important investment decisions you can make affecting the risk and long term return of your portfolio. As a new investor, let’s focus on your portfolio's split between stock (equity) index funds or bonds (fixed income) index funds. 
Stocks are shares of a company.  Say a company wants to raise money to reinvest in its business by buying new equipment or conducting R&D, the company will sell a share or portion of itself on an exchange like the New York Stock Exchange (NYSE) or NASDAQ.  Investors buy the shares of the company giving it funds to invest in its business and the investor gets a “share” of all future profits of the company-either through share price appreciation and/or dividends.  The business could succeed in the future and the investor will receive increasing dividend pay…

So what are index funds and why passive investing?

Passive investing is based on a theory called the efficient market hypothesis.  It basically says that all information is already known and incorporated into the stock price of publicly traded companies and so there is no way for investors to identify undervalued assets.  You hear a piece of news that causes a company’s share price to rise-by the time you are able to call your broker or place a trade online-the market has already moved.  Because the stock price of companies always already reflects all publicly available information it is impossible to “beat” or outperform the market so you’re better off trying to match the market through index funds.
Now you’re saying to yourself…what about all of those people who bought Amazon or Netflix ten years ago-they’ve far outperformed the S&P 500?  How likely is it that you with your family commitments and day job are going to have the time to go through all of the stocks traded on the Nasdaq or New York Stock Exchange and identify the n…

Index Investing Essential Reading List

In order to take control of your financial future, it is important to educate yourself on the theory of passive investing.  I recommend the following books and publications to build a foundation (in addition to checking out this blog periodically).
A Random Walk Down Wall Street, Burton Malkiel (The passive investing bible and the only personal finance book you’ll ever need)The Bogleheads Guide to Investing, Mel Lindaur, Taylor Larimore, Michael LeBoeufIndex Investing for Dummies, Russell WildWall Street JournalFinancial TimesThe Economist

A Personal Finance Guide-Learn to Manage Your Own Retirement and Investment Accounts!

I’ve decided to start this personal finance blog to empower workers like myself to take control of their finances.  I always felt a bit overwhelmed when it came to managing my money especially retirement savings.  The message that I should be saving a portion of my annual income in a 401k did sink in, however, I did not put much effort into managing my nest egg.  I make a good salary as an engineer but all through my twenties and thirties I’d save just enough to get the company match-typically 4-6% depending on who I was working for…and that was about it. 
Whenever I changed jobs, overwhelmed by learning my new role and a mountain of HR forms, I’d sign up for the company 401k.  And then I spent a total of 5 minutes determining where to put the money that would ensure my security for the 30-40 years after retirement.  I usually invested in target date funds per my age (2040/2045).  I never looked to see how my investments were performing (or cost) other than quick glances at annual st…